On page 11 of the OECD report to the recently concluded G8 Summit titled “A Step Change in the Transparency Agenda” is the following footnote:

“In view of the next G20 Summit, we also strongly encourage all jurisdictions to sign or express interest in signing the Multilateral Convention on Mutual Administrative Assistance in Tax Matters and call on the OECD to report on progress. See paragraph 14 of 19 April Communique of G20 Finance Ministers and Central Bank Governors.

Paragraph 14 of the 19 April Communique of the G20 Finance Ministers and Central Bank Governors reads as follows:

“More needs to be done to address the issues of international tax avoidance and evasion, in particular through tax havens, as well as non-cooperative jurisdictions. We welcome the Global Forum’s report on the effectiveness of information exchange. We commend the progress made by many jurisdictions, but urge all jurisdictions to quickly implement the recommendations made, in particular the 14 jurisdictions, where the legal framework fails to comply with the standard.

Moreover, we are looking forward to overall ratings to be allocated by year end to jurisdictions reviewed on their effective practice of information exchange and monitoring to be made on a continuous basis. In view of the next G20 Summit, we also strongly encourage all jurisdictions to sign or express interest in signing the Multilateral Convention on Mutual Administrative Assistance in Tax Matters and call on the OECD to report on progress.

We welcome progress made towards automatic exchange of information which is expected to be the standard and urge all jurisdictions to move towards exchanging information automatically with their treaty partners, as appropriate.

We look forward to the OECD working with G20 countries to report back on the progress in developing of a new multilateral standard on automatic exchange of information, taking into account country-specific characteristics. The Global Forum will be in charge of monitoring. We welcome the progress made in the development of an action plan on tax base erosion and profit shifting by the OECD and look forward to a comprehensive proposal and a substantial discussion at our next meeting in July.”

The Black-List

The clear mandate from the G20 Finance Ministers and Central Bank Governors to the OECD is to create a ranking – a list – of jurisdictions based on their Phase 2 Assessment on the effectiveness of their legal regime for exchange of information ‘on request’, which is the standard that OECD Global Forum endorsed at its 2009 meeting in Los Cabos, Mexico.

In addition to that Assessment, jurisdictions who had unresolved issues from their Phase 1 Assessment, though given a ‘pass’ to Phase 2, committed to providing updates about their progress in changing certain determinations made about their legal regime supporting information exchange from ‘not in place’ or ‘in place but needs work’ to ‘in place’.

The documents publicly available on the OED Global Forum (GF) website http://www.oecd.org/tax/transparency/provide no evidence that, at the last plenary session of the GF, held last year in South Africa, members agreed a ‘step change’ to the transparency agenda which has been the basis of their compliance activities since 2009.

Further, there has been no public information released to indicate that the GF will meet before September this year to consider what has emerged from the G8 meeting; and what will emerge from the next meeting of the G20 Finance Ministers and Central Bank Governors next month. GF Plenary sessions are held annually. This year if the meeting is held after September it means that GF members will have about 10 weeks to demonstrate satisfactory compliance under the Phase 1 & 2 Assessment criteria before the OECD is expected to produce its ‘rankings’. That is, of course,if GF members wait until the G20 confirms the expected move to ‘automaticity’.

Assuming therefore that, as was the case with the ‘on request’ transparency standard, recommended by the OECD, then accepted by the G8 and finally, confirmed by the G20 as the global standard; the new ‘automatic sharing’ standard, crafted by the OECD,now endorsed by the G8 ,will likely be confirmed by the G20 as the new standard this September.

As happened in 2009, by year-end the OECD may well produce a list of jurisdictions in ‘substantial compliance’ with the prevailing ‘on request’ standard. Given though that the 2012 ‘whitelist’ excludes only one member of the GF – Nauru – any adjustment to the ranking will likely be based on new information available since that table was published.

I suspect that the reason why the OECD, in its report to the G8, reiterated the recommendation by the G20 Finance Ministers and Central Bank Governors that all jurisdictions should sign up to the new ‘automatic’ standard, or at least express a willingness to do so, is to avoid GF members being ‘blacklisted as a ‘tax haven’ or an ‘uncooperative jurisdiction’.

The implication may be that even if a jurisdiction’s assessments are insufficient to justify a ‘pass’ under the old dispensation, this can be remedied by its early acceptance of the new ‘automatic’ standard, evidenced by signing or expressing an interest in signing the OECD Multilateral Convention on Mutual Assistance in Tax Matters.

Indeed, this may well explain the significant up-tick in interest from GF members in the OECD Multilateral Convention since the April meeting of the G20 Finance Ministers and Central Bank Governors.

My prediction, based on the above, is that the next OECD ranking of countries will include a category of jurisdictions who have indicated no interest in the new automatic exchange of information standard and have yet to receive a passing grade in either one or both of their assessments.

What do not know is whether a jurisdiction who is fully compliant with the elements in both assessments, if such a jurisdiction exists, will still be blacklisted by the OECD,if they too, express no interest in ‘automaticity’.

Offshore wealth is now at 8.5 trillion dollars – a rise of 6.1 percent – and is expected to reach 11.2 trillion dollars by 2017.

According to the Boston Consulting Group the top three destinations for this money are Switzerland, Singapore and Hong Kong; who together have only managed to muster a total of one Tax Information Exchange Agreement (TIEA) out of the 800 currently in force.

Is there a correlation between this fact and the increasing popularity of these countries among High Net Worth and Ultra High Net Worth Individuals?

Absolutely!

Besides the fact that they, along with their competitors in the rest of the offshore world offer discretion; and a broad, specialised and diversified suite of private banking services and expertise; these countries have a large and growing network of double taxation agreements.

They know that tax treaties are integral to providing asset solutions to the rich and mobile. TIEAs, on the other hand, add nothing to the profile of these destination countries for offshore wealth. Instead they know that in the marketplace TIEAs serve only to dilute their business brand.

This is especially so since the global standard on tax information exchange, contained in TIEAs, is reflected in their tax treaties, most of which, over the past five years, have been systematically updated in line with the OECD standard.

Why else would they have secured a passing grade in their OECD Phase 1 Assessments which determines whether a country has the requisite number and type of agreements demonstrating their commitment to the international standard.

OFCS need to stop diverting their national wealth, which is after all the collective wealth of their people on TIEAs that were never expected to provide the definitive solution to lack of access to confidential taxpayer information.

OFCs need to stop blindly fuelling the work programme of the OECD especially when these plans seem only to gain momentum, even among its own membership, under threat of sanction by the G-20.

By now, OFCs ought to have recognised that, in the past five years since the TIEA programme was re-launched, precious little has changed; and what was before has only been reinforced. Indeed the OECD itself has said it is still too early to gauge the success or otherwise of these agreements and now has its eyes firmly fixed on populating its own multilateral convention on information exchange and the global FATCA+ agenda.

Most importantly, however, OFCs need to note that with the rise in HNW and UHN individuals projected to come from the Asia-Pacific region and not the West, it is unlikely that they will gain any part of this new market if they continue to focus their attention and resources on trying to measure up to shifting OECD standards and not minding their own business.

“It’s their own fault”, claims a former head of the Bahamas Chamber of Commerce in expressing his support for the government’s plan to impose a Business Licence fee on the Bahamian commercial banking sector equivalent to 3 per cent of their annual gross revenue. Also announced was a new stamp duty on profits and dividend repatriation; and fee increases phased over two years for banks and trust companies in the offshore sector.

These budgetary measures unveiled by Prime Minister Perry Christie in his 2013-2014 budget could yield between $5.04 million and $5.16 million for the Treasury from at least one Canadian bank which generated $167.91 million in interest income last year alone.

According to the government the new taxes are designed to increase the country’s tax base using the previously untaxed revenue of the Canadian banks operating in the Bahamas. Currently, the commercial banks pay no business licence fees, only asset-based fees, to the Government.

PM Christie has said that the increased revenue would help to finance the operations of Bahamian financial services regulators but this may not be enough to stop the Canadian ‘snow-birds’ from heading due south for the winter.